Electronic Arts’ loss widens on rising expenses
Electronic Arts Inc., the world’s biggest video game company, posted a wider fiscal fourth-quarter loss Tuesday despite better-than-expected sales, triggering a nearly 4% drop in its shares in after-hours trading.
EA, whose titles include “The Sims,” “Madden Football” and “Medal of Honor,” raked in revenue of $1.1 billion in the quarter ended March 31, up 84% from a year earlier. But higher costs to create games led to a loss of $94 million, or 30 cents a share, compared with a loss of $25 million, or 8 cents, a year earlier.
“On balance, we’re very pleased with our revenue growth, but not yet happy with our profit margins,” Chief Executive John Riccitiello said in a statement.
The trend is likely to continue. Redwood City, Calif.-based EA said it expected to report per-share earnings of $1.30 to $1.70 for its current fiscal year on sales of more than $5 billion. Wall Street analysts polled by Thomson Financial had on average anticipated per-share earnings of $1.74 on $4.6 billion in sales.
EA’s projections spooked investors, who sent EA’s shares down $1.87 to $52.70 in extended trading after the earnings release. The shares had gained 30 cents to $54.57 in the regular session.
“The good news is that they’re growing revenues faster than anybody expected,” said Michael Pachter, an analyst with Wedbush Morgan Securities. “The bad news is they’re also growing expenses faster than anybody expected.”
Riccitiello, in a conference call with analysts, said salaries for developers in studios outside of the U.S. had swelled because of the weak dollar. EA also is investing more heavily in creating its own game franchises, which can have higher profit margins than externally licensed properties for which the company has to pay royalties.
“They view this as a long-term investment in their studios,” said Colin Sebastian, an analyst with Lazard Capital Markets. “They’re building out a lot more franchises than they have before, so the risk and reward scenario is higher. If they perform well, they will have big successes. On the other hand, if they don’t do well, the pressure on their margins will continue.”
Riccitiello said EA aimed to get research and development costs below 25% of revenue, down from 28% last quarter.
Riccitiello, who became EA’s chief executive last year, launched a reorganization in July that focused on improving the quality of its games. Because the games made under the new regime won’t hit store shelves until September or later, Riccitiello counseled patience.
“When you go through these long-term changes, some will have a longer fuse than others,” he told analysts. “But most of our games have a 12- to 18-month gestation period, if not longer.”
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